An I.O.U. issued by a borrower- indicates a fixed rate of interests to be paid, loan repayment becomes due.

Which is easier to sell, bonds or individual loans?

Bonds

Loan Backed Securities

" Bundels " of mortgages, student loans, are to back bonds. Issued by banks, to get more money to lend off

The guarantee the bonds interest + principal will be repaid depends on...

How likely the underlying loans will be paid off

Stocks

A share in the ownership of a company. It is your assetif you own it. It is the company managements liability. ( Same thing they owe to others ). They pay higher returns over time then bonds. Riskier then bonds.

Bonds have a

1st LIEN on company revenue

Mutual Funds

Professional investors pick a portfolio of the stocks/ bonds they think will pay off the best. You then buy shares in their mutual fund.

Company

Each share gives you a partial ownership of hundreds of stock shares.

Advantages

Diversification professional stock selection ( for a fee )

Pension funds, life insurance funds

Work like mutual funds: You pay premiums, but professional investors use them to buy stocks/bonds. Out of investment earnings they pay you pension or death benefits.

Banks

Take money from deposits, invest in, mostly by making individual loans,some from investment in Gov't bonds.

Gov. spends $ on more than just goods and services. It also spends $ on Transfers/ ( Social Security pension payments ).

Total gov spending

G: g+S + G: transfers

For U.S. to import more than it exports, U.S. has to

1. Borrow foreign money.

2. Get foreign money by selling assists( Rockefeller center in NYC.) ( Net flow of foreign savings into U.S. )

If U.S. wants to sell more to foreign countries than it buys from them, U.S. must

1. Lend $ to foreigners

2. Buy assets owned by foreigners ( Buy down town Tokyo. ) ( Net outflow of U.S. savings from the U.S. )

What drives spending on consumer goods

1. Disposable income

2. Wealth- If your wealth goes up you spend more.

Consumption function =

C= $ amount * ( y-t ) + wealth

After WWII, what did the consumption function do

Shifted upward, b/c of interest in wealth during the war.

What did cheap interest rates do during 1998-2006

Caused the housing boom

What do interest rates affect

You investment decision through Opp. cost, even if you save for you new car or factory.

The accelerator

The effect of GDP/ income growth on investment. : The more business see income growing, the more they think it will result in Increased demand for their product, so the more new factories they build ( investment ) to supply the product

Production capacity

The closed factories are to operating at full capacity, the more a change in income, ( the accelerator effect ) will increase investment